1. Introduction

When a company is incorporated in Nepal under the Companies Act, 2063 (2006), its capital is divided into shares, and ownership is represented through those shares. Shareholders are the true proprietors of a company, and their rights and obligations depend on the class of shares they hold.

The two principal types of shares recognized under Nepalese company law are Ordinary (Equity) Shares and Preference Shares. While both represent ownership, they differ in rights, privileges, and risk exposure.

2. Legal Definitions: What Nepalese Law Says?

Companies Act, 2063 (2006) is the primary statute governing companies in Nepal. Under this Act:

• A share is a unit of share capital of a company.
• A preference share is a class of share specially designated as such, with preferential rights regarding dividends or repayment of capital, or both.
• An ordinary share (sometimes called equity share) is any share that is not a preference share. The rights of ordinary shares are those provided by law and by the company’s constitutional documents (memorandum & articles) for ordinary, non-preference shareholders.

Section 65 of the Companies Act allows a company to issue preference shares, but imposes requirements: any issuer must state in the offering / constitutional documents what exactly the preference rights are, and specify details like whether the shares are redeemable, cumulative vs. non-cumulative, and whether convertible.

3. Key Rights and Differences: Ordinary vs. Preference Shares

Dividend Rights

Ordinary Shares

Share in profits only after preference dividends are paid; no guaranteed rate unless articles provide otherwise.

Preference Shares

Entitled to a specified rate or priority dividend before any dividends on ordinary shares. If cumulative, unpaid dividends accumulate; if non-cumulative, no accumulation unless declared.

Priority on Liquidation

Ordinary Shares

Lower priority: in event of winding up the company, ordinary shareholders are paid after creditors and after any preference shareholders who have capital repayment rights.

Preference Shares

Higher priority: in liquidation, recovery of capital (to the extent of preference rights) comes before ordinary shareholders.

Voting Rights

Ordinary Shares

Normally full voting rights on ordinary business, per share, unless articles restrict or create different classes.

Preference Shares

Often restricted: many preference shares do not carry voting rights except in certain special situations (for example, if preference rights are being altered, or in cases affecting their class rights). The articles must specify any voting rights.

Convertibility

Ordinary Shares

Ordinary shares are generally non-redeemable (unless special legal or contractual provisions exist) and non-convertible.

Preference Shares

Can be designed to be redeemable (company must repay capital under conditions you define) or perpetual (no redemption date). Conversion into ordinary shares is possible but only if the articles permit it, and subject to the Act’s requirements.

Risk Exposure & Return

Ordinary Shares

Higher risk: last to get paid, but greater potential upside with profits, and influence over the company.

Preference Shares

Lower risk relative to ordinary shareholders (on dividends and capital), but possibly limited upside. Also, pref. shares can become disadvantageous if company fails to generate enough profits to pay fixed preference dividends.

4. What the Companies Act Requires When Issuing Preference Shares

When a company issues preference shares, the issuer must ensure the following:

• Power and authority: The memorandum/articles must authorize issuance of preference shares and set out their class rights (Section 65 requires disclosure of key matters). If the articles are silent, the company must amend articles before issuing a new class.
• Class rights clearly stated: Dividend rate (fixed or formula), priority on liquidation, cumulative vs. non-cumulative, redemption terms (dates/conditions), convertibility and any limits on voting. Record these in articles and the prospectus/private placement memo.
• Compliance with disclosure/prospectus rules: If a public offering is made, prospectus rules and disclosures prescribed by the Act apply. Even private placements should have clear offering materials.
• Register and certification: Maintain shareholder register and issue share certificates that reflect class rights; update register with OCR/Registrar filings as required.

Nepal Laws

Regulatory approvals (sectorial): For regulated entities (banks, finance companies, listed companies), SEBON, Nepal Rastra Bank (NRB) or other regulators’ rules may apply (e.g., special capital treatment for perpetual preference shares issued by banks). Check sectorial rules before issuance.

5. Special Issues & Recent Regulatory Developments

• Banks/financial institutions (BFIs): NRB and SEBON have in recent years allowed certain types of preference instruments (e.g., perpetual non-cumulative preference shares) as part of capital-raising frameworks, subject to approval and specific conditions (disclosure, conversion on non-viability, capital treatment). If advising a BFI, coordinate approvals from NRB and SEBON. This is a fast-moving area; follow regulatory circulars closely.
• Non-convertible preference shares & market acceptance: SEBON/market commentary has noted that non-convertible preference structures raise legal and regulatory questions (e.g., whether they fit within existing securities categories). Regulators review such structures carefully before approval.
• Variation of class rights: The Act and company law doctrine require that class rights (e.g., preference terms) not be varied without appropriate procedural safeguards typically a class meeting and adherence to the articles; minority protection principles apply. Draft variation clauses cautiously and follow statutory steps.
• Intersection with listing rules: For listed companies offering preference shares, SEBON’s listing and disclosure rules will apply; expect requirements for investor protection and clear public disclosure.

6. Tax Perspectives: Ordinary vs. Preference Shares in Nepal

Tax on Dividend Income

Under the Income Tax Act, 2058 (Nepal), any company that distributes dividends to its shareholders is required to withhold 5% tax at the time of payment or declaration of the dividend.

This rate is generally applicable whether the shareholder is a natural person or a company.

The company paying the dividend is required to withhold the tax at the time of distribution and then remit it to the tax authorities.

For the shareholder (recipient), this withholding usually serves as a final tax in respect of dividend income. That means the 5% generally settles the tax liability for the dividend itself (for many resident individual shareholders).

Example:

If a company declares a dividend of NPR 100,000, it must withhold NPR 5,000 as tax and distribute NPR 95,000 to the shareholder.

Thus, preference shares which usually pay fixed dividends do not enjoy any special tax concession. Both share types are taxed identically when it comes to dividend distribution.

7. Tax on Capital Gains (Sale or Transfer of Shares)

When shareholders sell or transfer their shares, the profit they make is considered a capital gain, which is subject to tax at rates that depend on whether the shares are listed or unlisted and the duration of holding.

Listed shares (i.e. shares traded on Nepal Stock Exchange)

• Individual (residents):
  7.5% if sold within 365 days (short-term).
  5% if held more than 365 days (long-term).
• Institutional/Country entities:
  A higher rate (often 10%) on gains, depending on whether listed/unlisted etc.

Unlisted shares

• Individuals or Entities:
  10% capital gains tax on gains regardless of holding period (i.e. rate does not differ by short- vs. long-term) when they are unlisted shares.

8. Practical Implications

If you issue preference shares that are unlisted, and if there is a market or mechanism for transfer, the holder of those shares may have to pay 10% CGT on sale or transfer, regardless of how long they held them.

For ordinary shares listed on NEPSE, if the holder is a resident individual, keeping them for more than one year gives a lower CGT rate (5%) compared to short-term (7.5%). That can be an incentive for long-term investors.

If shares are not traded (i.e. private or unlisted), or if the preference shares are structured to avoid frequent trading, this difference may matter less, but CGT still applies on any transfer or sale.

9. Real-World Examples (What Happened & Why It Matters)

Here are several concrete cases involving Nepalese BFIs (banks) that have attempted or succeeded in issuing preference shares (especially perpetual/non-cumulative), or have been stymied by regulators.

Nabil Bank

Proposed issuance of 8% irredeemable, non-convertible (non-cumulative) preference shares worth NPR 5 billion. Approved by its Special General Meeting.

NRB rejected the proposal. The reason given was violation of NRB’s unified directive(s) specifically that the proposal included a fixed repayment/maturity period or terms inconsistent with the directive’s requirements for preference shares.

Ensure preference share terms (redemption, convertibility, and vote rights) align with NRB’s directive; avoid redemption/maturity features that directors/regulations prohibit.

Kamana Sewa Bikas Bank

Decided in its AGM (or board / shareholders’ meeting) to issue non-redeemable, non-cumulative preference shares, with a 9% dividend rate (applicable only in profitable years). The amount: approx. NPR 350 million.

Make sure SEBON’s directive and statute allow the precise class rights being proposed.

NIC Asia Bank

Announced plan to issue NPR 5 billion in preference shares as a strategy to reduce capital pressure.

Engage regulator early, model scenarios under stressed profits, ensure full disclosure of risks to investors.

10. Wider Sector Trend: The Rise of PNCPS

Following these high-profile attempts, SEBON’s Ninth Amendment (July 2025) formally recognized Perpetual Non-Cumulative Preference Shares as eligible securities for BFIs.

This regulatory shift resolves earlier ambiguities and aligns Nepal’s capital-instrument framework with Basel-III standards.

11. Other Tax Issues Relevant to Ordinary and Preference Shares

Bonus Shares

Bonus shares (stock dividends) generally do not trigger dividend withholding at the time of issue. But when those bonus shares are sold, capital gains tax (as per above rates) will apply, using an adjusted cost basis.

Transfer / Stamp Duty

When shares (ordinary or preference) are transferred, there may be stamp duties or transfer-tax/transfer charges imposed depending on how the transfer is done.

Corporate Tax of the Company

Dividend paid to preference shareholders is not tax-deductible as a business expense.

Effect on Investor’s Overall Tax Liability

Some preference shares might come with additional features (redeemable, convertible, etc.) which could affect when gains are realized.

12. Conclusion

In summary:

• Ordinary shares are your typical equity, they give voting power, upside, but also bear most of the risk.
• Preference shares are tools to provide some protection to investors (via priority in dividends or liquidation) while allowing flexibility in control and risk.

If you are considering issuing preference shares, it is essential to:

• Think through the financial implications,
• Ensure your constitutional documents (memorandum & articles) are drafted carefully,
• Comply with all regulatory obligations, and
• Anticipate future stresses or shifts in regulatory environment.